Monopoly Slides


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Monopoly Slides

  1. 1. In brief, what is a monopoly In relation to MicrosoftA copyright from the Government gives Microsoft the right to make and sell copies ofthe Windows operating system. So when we decide to purchase a copy of Windows, wehave little choice but to pay the price that the firm charges for the product. Microsoft issaid to have a ‘Monopoly’ in the market for windows as it is used by over 90% of thePC’s in the world! A Monopoly like Microsoft has no close competitors and therefore caninfluence the market price of its product. A Monopoly firm is referred to as a ‘pricemaker’.Market Power:Alters relationship between a firm’s costs and the price at which it sells that product tothe market. A competitive firm takes the price of its output as given by the market and thenchooses the quantity it will supply so that price=marginal cost. The prices that a monopoly charges exceeds marginal cost. This is evident in thecase of Microsoft’s Windows. So, without a doubt, it’s no surprise that monopolies charge high prices for theirproducts. So why don’t Microsoft charge €500 instead of €50 for their software?? Theanswer is simple- Because the higher the price they charge, the fewer people who willpurchase their product at that price. People would find other alternatives such aspurchasing less computers, changing over to other operating systems or take the illegalroute.. We must remember that monopolies cannot actually obtain any level of profit theywish. Why? Because higher prices result in fewer customers.Below is a link on an interesting article on the issue of ‘The Microsoft Monopoly: TheFacts, the Law and the Remedy’.
  2. 2. Why monopolies arise? Monopoly: A firm that is the sole seller of a product without close substitutes. Firms are said to have a monopoly power if they are a dominant seller in the market and can exert some control over the market because of this. The fundamental cause of a monopoly is ‘’barriers to entry’’: a monopoly stays the only seller in its market as other firms cannot enter/compete with it. Barriers to entry have four main sources: Key research owned Barriers To by single firm EntryGovernment gives a firm A firm can gain controlthe exclusive right to of other firms in theproduce some good/service market and therefore grow in size Costs of production make a single producer more efficient than large numbers of producers
  3. 3. Example- owner of a well Exclusive ownership of has a monopoly on water a key resource is Firm owning a key potential cause of a resource monopoly Monopoly ResourcesMonopolists have much Monopoliesgreater market power rarely arisethan single firms in because if thiscompetitive markets Monopolists can charge high price for necessities like water There are few examples of firms that own a resource that has no close substitutesMonopolies happen Patent/Copyright laws are usedas Government has by Government to create agiven one monopoly to serve publicperson/firm the right interestto sell a good/service Government Eg:Pharmaceutic European Kings used to al companies grant exclusive licences created applying for a to friends and allies to patent raise money monopolies Laws on Governments can Patents/Copyrights give patents/copyrights grant a monopoly as 1 producer a monopoly have benefits and it’s viewed to be in costs the public interest. Higher prices occur Privatization of alcohol would In Sweeden-can control result in fatal accidents, suicides directly the sale of alcohol etc.
  4. 4. Firms less concerned aboutAn industry is a natural new entrants which maymonopoly when a single threaten its monopolyfirm can supple a power Monopolist’s profitgood/servide to an entiremarket attracts new entrants into market Natural Monopolies Market becomes more competitive Economies of scale over range Distribution of As markets expand, a of output water natural monopoly can evolve into a competitive market. A firm can produce a Pipes must be built large amount of by a firm in the town output at a low cost Average costs of water are lowest if only 1 firm serves the entire market.Large firms grown partlythrough Example: In UK, anytakeovers/merging and merger that gives a firmacquisitions 25% or more of market may be investigated External Growth Industry becomes more concentrated Firm may develop monopoly Governments monitor power over their rivals + use acquisitions to notice any barriers to make it difficult implications for for new firms to enter competitions.
  5. 5. Monopoly Vs Competition:The main difference between a competitive firm and a monopoly is the ability themonopoly has to influence the price of its output. Competitive firms are small relative tothe market in which it operates so it takes the price of its output as given by the marketconditions. In contrast, because a monopoly is the sole producer in its market, it canchange the price of its goods by altering the quantity it supplies to the market.The following video link below describes what a monopoly is in simple terms and alsothe problems associated with it.
  6. 6. A Monopoly’s Revenue:Total Revenue = Quantity sold × PriceAverage Revenue = Total Revenue ÷ Quantity of outputMarginal Revenue: A monopolists marginal revenue is always less than the price of itsgood and very different from marginal revenue for competitive firms. When a monopolyincreases the quantity it sells, it has two effects on total revenue: more output is soldand the price falls.Profit Maximization: How exactly do monopolistic firms maximize their profit? - They maximize profit by choosing the quantity at which marginal revenue equals marginal cost.The Welfare Cost of Monopoly:A monopoly charges a price above marginal cost. This makes monopoly undesirable toconsumers. The monopoly earns a profit from charging this higher price. This makes itdesirable to the owners of the firm. A consumer surplus is consumers’ willingness to payfor a good minus how much they actually pay for it.
  7. 7. Examples of Monopolies:Iarnrod EireannMicrosoftAmerican Telephone & TelegraphMajor League BaseballTelkomLong Island Power Authority